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Tuesday, 11 March 2014

Struggling South African Airlines begs for bailout

Fighting a low rand and high fuel costs with its ninth turnaround plan in 13 years, South African Airways urgently needs a cash injection. South African Airways' (SAA) executives are caught between their continental ambition and lack of cash. Technically insolvent, SAA is reliant on a R5bn ($443m) government guarantee to operate while discussions about a cash injection continue with the treasury. The size of the bailout required has not been disclosed, but an announcement is expected at the end of March.

Monwabisi Kalawe, who took over as chief executive in June 2013 following a purge of board members and executives in the latter half of 2012, says the board is investigating several countries in West Africa as a potential host as it tries to compete with Middle Eastern carriers. "They have been successful in absorbing air traffic to the Middle East and then distributing it. This is a risk for an airline situated at the bottom of Africa. Setting up a hub in West Africa is our attempt to mitigate that risk," Kalawe says. SAA has shortlisted Nigeria, Ghana and Senegal for its hub. It expects it will take a year or longer to finalise negotiations, but this will require an additional capital injection from the treasury.

Smoother Transit:

SAA is also lobbying to scrap transit visas, which would make Johannesburg more attractive to passengers travelling to other parts of the continent. "What we want to see is SAA being the flight of choice on the continent," Kalawe says. Most pressing, however, is stabilising SAA's finances. Its results for the financial year ended March 2013 were delayed by five months as talks continued over the bailout. Despite passenger numbers growing by 8% and the savings realised as a result of its 'Gaining Altitude' turnaround strategy, a 13% decline in the rand against the United States dollar contributed about R700m to its after-tax loss of R1.2bn.

The rand has declined by more than 30% since then, raising fears about the losses it will suffer in the current financial year. "The impact of the weakening rand is severe," says Wolf Meyer, SAA's chief financial officer. Increasing its technical operations on the continent will grow dollar-based revenue and act as a natural hedge, Meyer explains. Even without the challenge of a weakening rand, turning around the airline and reaching the break-even point by 2017/2018, as envisioned by the turnaround plan, will be no easy feat. Gaining Altitude is the ninth turnaround plan in 13 years. The company has not made detailed targets from the latest plan public, so it is impossible to gauge whether the plan is working.

Fuel Cost Imperative:

Political interference has been rife. Crucial to the plan is upgrading the fleet to more fuel-efficient planes, yet public enterprises minister Malusi Gigaba forced the board to withdraw a July 2013 request for proposals for 23 new wide-body, long-haul planes. Gigaba said it lacked "crucial elements of industrialisation and localisation, which are vital to South Africa's policies". New planes will cut SAA's fuel costs, which are currently 35% of operating expenses.

Considering not a single SAA long-haul route is profitable and that plane purchases typically have a lead time of five years, finalising the contract speedily is of great importance. There is no date for finalising the new request. "We are grappling with this new requirement for industrialisation and benefiting South Africa," Kalawe explains. Gigaba also instructed the board that no job cuts will be allowed as part of SAA's plans, as the "social and political cost is very high".